The once hefty premiums mid-cap stocks commanded over large-caps are a thing of the past. A huge sell-off in mid-caps has left the Nifty Midcap 100 index trading at a one-year forward price-earnings (P-E) multiple of 15 times, against the Nifty’s 17.1 times valuation. This puts the mid-cap index’s discount at a record high of 12%. For the majority of the time, the index has traded at a premium to large-cap stocks.

Mid-cap stocks typically fall at a faster pace when markets decline, which has been the case in the past year as well. When a correction is on the cards, portfolio investors prefer investments in stocks with high liquidity, which offer an easier exit.

Investors are increasingly turning risk-averse, according to market watchers. And the number of corporate governance and accounting issues that have cropped up in the past year has made them even more edgy. Besides, after foreign portfolio investors began to flee Indian equities in 2018, domestic mutual funds have shown a preference for large-cap stocks on expectations that risks there are lower. But as a result, many large-caps now have lopsided valuations, far removed from their earnings growth rates. Clearly, the watchword is “Better safe than sorry".

“Investors are not willing to re-look at mid-caps even if some of them are delivering higher growth rates," says Siddhartha Khemka, head of retail research at Motilal Oswal Securities Ltd.